1. Business Cycles Is the economy getting better or worse?

2. Business Cycles are changes or fluctuations in a market system’s economic activity.

3. 3 Fluctuations are measure by increases or decreases of the Gross Domestic Product GDP is The total value, in dollars, of all final goods and services produced within the nation each year Abbreviated as the GDP

4. 4 What does the GDP tell us? If the GDP is larger than last year the economy is expanding (getting bigger) If the GDP is smaller, the economy is shrinking (getting smaller)

5. 5 Business Cycle The Business Cycle allows people to understand the direction the economy (GDP) is going (growing or shrinking) and plan accordingly. The economy follows the Business Cycle regularly.

6. 6 Phases of the Business Cycle Expansion (Growing) Peak (Top) Contraction (Shrinking) Trough (Bottom)

7. 7 Business Cycle Peak Expansion Contraction Trough Expansion Peak Contraction

8. 8 Expansion During a period of expansion: Wages increase Low unemployment People are optimistic and spending money High demand for goods Businesses start Easy to get a bank loan Businesses make profits and stock prices increase

9. 9 Peak When the economic cycle peaks: The economy stops growing (reached the top) GDP reaches maximum Businesses can’t produce any more or hire more people Cycle begins to contract

10. 10 Contraction During a period of contraction: Businesses cut back production and layoff people Unemployment increases Number of jobs decline People are pessimistic (negative) and stop spending money Banks stop lending money

11. 11 Trough When the economic cycle reaches a trough: Economy “bottoms-out” (reaches lowest point) High unemployment and low spending Stock prices drop But, when we hit bottom, no where to go but up! UNLESS….

12. 12 Recession/Depression A prolonged contraction is called a recession (contraction for over 6 months) A recession of more than one year is called a depression

13. 13 What keeps the Business Cycle Going? 4 variables cause changes in the Business Cycle: 1.Business Investment When the economy is expanding, sales and profit keep rising, so companies invest in new plants and equipment, creating new jobs and more expansion. In contraction, the opposite is true

14. 14 What Keeps the Business Cycle Going? 2.Money and Credit Low interest rates, companies make new investments, borrow more money, adding jobs. When interest rates climb, investment dries up and less job growth 3.Public Expectations Forecasts of an expanding economy fuels more spending, while fear of a recession decreases consumer spending

15. 15 What keeps the Business Cycle Going? 4.External Factors / Shocks External Factors /Shocks, such as disruptions of the oil supply, wars, or natural disasters greatly influence the output of the economy Ex. 1992-2000 was the longest period of expansion in U.S. history. Early in 2001, signs of contraction appeared, though the Bush administration denied it. The Sept. 11 th 2001 terrorist attacks quickly caused the business cycle to shift into a contraction.

16. 16 Predicting the Future? Economists endeavor to predict the fluctuations n the business cycle. Decision- makers rely on these predictions to plan or implement their strategies. Economists rely on 3 types of indicators: Leading Indicators Coincident Indicators Lagging Indicators

17. 17 Leading Indicators A leading indicator is a measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Changes in the number of building permits Number of orders for new capital Price of raw materials Stock prices

18. 18 Coincident Indicators Rather than predicting future events, these types of indicators change at the same time as the economy or stock market. Personal Income GDP Sales Volume

19. 19 Lagging Indicators A lagging indicator is one that follows an event. The importance of a lagging indicator is its ability to confirm that a pattern is occurringlagging indicator Unemployment Consumer Price Index (CPI) that measure the change in inflation Number/size of Business Income

20. 20 Who Cares????? Why should you care about the business cycle and economy? Lots of reasons!

21. 21 “Don’t quit that job!” If the economy is going into a contraction, jobs will become more scarce. If you quit, you may not find another job! But, if the economy is in a period of expansion, jobs are readily available. It may be a good time to switch careers.

22. 22 “Should I make a big purchase?” Only if you know that you won’t lose your job in a contraction. So, buy your house during an expansion. HOWEVER, When the economy starts to slow down (contraction), interest rates will decrease. Wait to buy a house until the rates drop to a low point, if you are sure you won’t lose your job.

23. 23 Quick Review! What phase of the business cycle do wages go up? Expansion What phase of the business cycle do wages go down? Contraction

24. 24 Review cont. When are wages at their highest? Peak When are wages at their lowest? Trough

25. 25 More Review When will borrowing decrease? Contraction When will borrowing increase? Expansion When will borrowing be at it’s lowest? Trough

26. 26 Even More Review! When will unemployment be at its lowest? Peak When will business profits be the highest? Peak When should you look for a new job? Expansion